This study examines the long and short-run relationships between monetary policy and stock prices as well as some selected macroeconomic variables as inflation and exchange rates in Ghana for the period 1990-2006 by means of time series analysis. This study uses time series monthly data on all the variables and employs the Johansen’s multivariate cointegration technique (Johansen and Juselius, 1990) in conjunction with the Granger causality test to examine the possible long and short-run effects among the investigated series as well as the direction of these effects. The stationarity or otherwise of the series were determined by means of the augment Dickey-Fuller (ADF) test. The associated cointegration and vector error correction models were computed. All the series were identified to be integrated of the first order, I (1), thus stationary in first difference. The study then revealed only one cointegrating relationship among the series. More particularly, the study identified an expected long-run negative relationship between interest rates and stock prices and also between exchange rates and stock prices. Besides, it identified unanticipated long-run negative and positive relationships between money supply and stock prices and also between inflation and stock prices respectively. The results further provide evidence in favour of unidirectional causality running from money supply to stock prices and also a unidirectional causality from inflation to money supply. It also revealed bidirectional causality between inflation and interest rates for the period 1990:11-2006:12. Finally, the study made several recommendations for policy implications in Ghana. It was recommended that the central bank should take the dynamics of the stock market into consideration when adjusting its monetary policy since changes in interest rates and money supply have some considerable effects on stock prices. Also, it was recommended that the GSE and its officials should embark on a more rigorous publications and other public education through the print as well as the other media to address issues concerning the existence, operation and the relative importance of the stock market for a better insight into stock investments and to help channel any excess money into stock purchases. Lastly, it was recommended that great care should be taken in all policy decisions that do not directly target the stock Exchange as these may have their indirect effects on the Exchange.

Description:

A Thesis submitted to the Department of Economics in partial fulfillment of the requirements for the award of the degree of Master of Arts Honours in Economics, 2009